What is a trust?
A trust is where one person, the “trustee”, holds the title to and manages property for someone else's benefit. The trust is established by the “grantor”, and benefits the “beneficiaries.” A trust can hold a house, personal property, money, insurance proceeds, or other personal or real property. A beneficiary can be almost anyone – a family member, a friend, a charity, or even in some cases, the trustee. Trusts are an incredibly powerful tool for protecting your legacy and ensuring that your wants and needs for estate planning are met.
A common misconception is that trusts are only for the well-to-do who have large estates. But this is entirely wrong. Trusts have a place in the estate plans of all kinds of people. This includes those with only modest estates. Trusts can be used to protect assets from creditors, shield an estate from certain taxes, or preserve property for children. They can be used to make a person available for government benefits. And they can be used to manage assets and funds for those incapable of doing so themselves.
Types of Trusts
Revocable Living Trust
This is the granddaddy of trusts in estate planning. They are different than wills but often work hand-in-hand with them to distribute the estate. Revocable living trusts are most often used to avoid probate.
Trusts for Minors
This is a trust that holds and helps manage money for children until they reach the age of majority. Courts require that inheritances for children be placed in court. Trusts can distribute money on a regular basis or all in one go when the child is old enough. Once a child reaches a certain age or accomplishes a goal (e.g., bachelors degree), the trust will pay out.
Supplemental Needs Trusts
When a person becomes disabled they often are in need of Medicare or funding from another government program. But in order to qualify for the program, they are prohibited from having assets above a certain amount. Supplemental Needs Trust and Special Needs Trusts can be used to allow the person with disabilities to use additional funds, above the asset cap, to supplement their lifestyle above and beyond what the benefits provide.
Marital Trust (A/B Tax Planning)
Married couples will often use trusts for a variety of reasons. Not the least of which includes asset protection and avoiding taxes. In 2023, the tax exemption in Minnesota is $3 million, and on the Federal level, the exemption is $12.92 million (or, for married couples, $25.84 million!). There is always potential for a lower State or federal tax exemption in the future. Marital trusts can allow married couples to take full advantage of the available exemptions. Additionally, marital trusts can be used to protect property for children and grand-children. For example, if a spouse who dies has children from a previous marriage, a trust can ensure that they get an inheritance and are not cut out – purposefully or accidentally – by the surviving spouse. They can also ensure children of a marriage get a certain inheritance regardless of whether the surviving spouse remarries.
Compulsive Behavior Trusts
Compulsive behavior trusts hold money for someone who has substantial creditors or is unable to manage money for themselves. Take for example, someone who is immature, has a drug or gambling problem, or is a compulsive shopper. Money can be doled out to them over time instead of paid to them in one lump sum. If, for example. a person with a drug problem falls off the wagon and starts using drugs again, the person can be cut off until they finish rehab. Because these trusts are managed by an independent third person, there is less opportunity for misuse.
A Valuable Estate Planning Tool
Trusts can be incredibly powerful estate planning tools. When used and set up properly, they can ensure that your legacy is what you want it to be. Used or set up improperly, and they can tie up your assets in court for years. When working with our clients, we advise that not everyone needs a revocable living trust. There are “trust attorneys” out there who work under the philosophy that everyone needs a trust, regardless of their circumstances. A properly drafted will with the correct strategy can serve just as well if not better in some cases, depending on your circumstances. When you work with us, we’ll work with you to identify if a trust is the right estate planning tool for you.
“Greg helped us update our will to a trust. He also helped my wife with her health directive. We were impressed with his depth of knowledge about trusts. He had a very helpful approach to a challenging aspect of our particular situation. He was always able to find time meet with us on short notice. The final documents seem very comprehensive and give us confidence that our wishes will be followed in the future.”
Ready to Learn More About Trusts?
At Signature Law, our goal is to make sure that your estate plan fits your needs and does what you want it to do. Using trusts may be the way to make sure this happens. If you would like to discuss the best ways to structure your estate, possibly with trusts, then schedule a free consultation.
